East African community (EAC) is a regional economic bloc established to foster economic corporation between Kenya, Rwanda, Burundi, Uganda and Tanzania. Using gravity model the study explores the short run and long run effect of East African community (EAC) on trade using parametric, random effect and fixed effect estimation techniques. Secondly, the study investigates whether formation of EAC led to trade creation or trade diversion in the long run among the member countries of EAC. Lastly, the study establishes the effect of entry of Burundi and Rwanda to the economic bloc of EAC on trade. The study used panel data obtained from the five countries of EAC for the period 1985 to 2019. Breausch Pagan LM test for restrictions in the parametric model and Hausman test for endogeinity in the gravity model found out that fixed effect estimation technique produced accurate and plausible results than parametric and random effect estimation techniques. The empirical results of fixed effect model established that trade across EAC member countries rose by 1.6% in the short run while random effect and parametric models recorded 3.6% increase in trade in the short run. This effect was insignificant meaning that trade between EAC member countries did not expand considerably in the short run. In the long run, fixed effect indicate that EAC increased trade by 24.2% while random effect and parametric model each show that EAC increased trade by 16%. The coefficients are statistically significant at 5% ceteris paribus. Secondly, economic corporation of EAC led to trade creation in Burundi, Kenya, Rwanda and Uganda by 41.6%, 12.2%, 33.9% and 30.1% respectively and trade diversion by 4.2% in Tanzania. Thirdly, entry of Burundi and Rwanda to EAC increased trade of EAC countries by 19.6%. The coefficient is statistically significant at 5% level. The results of random effect and parametric model each indicate a growth in trade by 19.1%. The results of parametric, random effect and fixed effect estimation techniques are all consistent. Lastly, the study established that countries in EAC ought to foster greater growth in GDP, to encourage and strengthen use of common language and to reduce cross border restrictions in order to realize more growth in trade.
Has the East African Community Regional Trade Agreement Created or Diverted Trade? A Gravity Model Analysis